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A report last week by the San Diego City Auditor’s Office suggests the city could save more than $3.5 million per year by moving employees out of leased office space downtown.

Auditors recommended the city’s Real Estate Assets Department include estimates of the cost of moving employees out of downtown in future presentations to the mayor and City Council. Currently, the city spends $12.2 million each year leasing more than a half-million square feet of space in three downtown buildings.

Due to the inefficiency and age of the rented space, the city leases an average of 315 square feet for each of the 1,633 employees working there. Auditors concluded the city could conservatively expect to reduce the space per employee by 29 percent to 225 square feet by moving the workers out of downtown, where rents are 20 percent higher.

“The city may well have legitimate policy reasons for maintaining a sizable presence in downtown,” the report states. “However, the city administration and City Council should be fully informed of the fiscal impact of such a choice on the city’s budget and of the availability of other alternatives.”

In its response to the audit, the department said it was premature to suggest that moving employees out of downtown is in the best interest of the city.

“(The department) is in complete agreement with the Auditor that all lease or acquisition transactions receive a thorough financial analysis when presented to the city’s administration and council,” the response said. “However, without a full investigation of the real estate market and determining the total cost of occupancy, it would be premature to determine where City employees would best be located.“

The response noted that most of the city’s workers are currently housed downtown, including workers in properties the city owns. It said keeping workers in leased space downtown also has the dual advantage of keeping them close to the City Council and public transportation.

“While the buildings that the City currently occupies are inefficiently configured, their efficiency can be improved significantly by constructing tenant improvements that reflect the City’s new office space standards,” the response said. “Ultimately, a financial analysis that takes into account the total cost of occupancy will advise the City’s decision makers where to house its staff.”

The Watchdog has been reporting for months on the city’s efforts to renegotiate its downtown leases. A well-regarded downtown lease negotiator who originally negotiated all three leases, Jason Hughes, has offered to his services to the city for free.

The city has ignored Hughes offer, saying it wants to see what services and prices other companies will offer. Department Director Jim Barwick did not respond to an email asking for an update on that process on Friday.

Commercial real estate experts say negotiations for large leases should start at least two years before they expire to ensure tenants can threaten to move to a new location as leverage in the deal. None of the three city leases expire more than two years from now, and one will expire in May.